The iShares Mortgage Real Estate Capped ETF NYSEARCA: It's important to understand this ETF is invested in the mREIT industry. If you're unfamiliar with mREITs, this is a good place to start, as I'll be analyzing the ETF. This fund covers a sector which changes quite substantially and if there is a market panic could see an insane drawdown. This is an option I would use if I was new to the sector and didn't really understand the mREIT business and knew choosing companies on my own would be way too risky. The expense ratio is currently. This is on the expensive side, but if an investor wants the sector exposure and options understand it, then this is an acceptable expense. I strongly prefer doing the necessary due diligence and making individual allocations, but options expense is a way for investors to get around doing the research. The yield is currently at 9. This didn't come as a surprise though. There were also very few mREITs in a position to raise their dividends. The year comparison will be from May 4,which is slightly over 10 years but strategies inception date of the fund. Over the last 10 years REM crazy had total returns of In case you thought the max drawdown of Think about that for a second. Of course, they wouldn't have that much money left to plow in either. The annualized volatility for REM was While the dividend yield in the mREIT sector can be attractive by itself, before investing it's important to make sure what the underlying risks are. The mREIT sector is currently at high valuations overall just like we've seen in the market. Over the last 2 years, REM has seem some pretty decent crazy. REM has had total returns of All things considered over the past decade, I was hoping for this to look a bit better given how volatile REM is and how it's performed. I'll simplify what the volatility looks like over the last 2 years:. As you can tell, even though REM has had superior returns, it's been materially more volatile than SPY. The difference in max drawdown is massive. With these very high volatility investments, Dollar Cost Averaging makes sense. It isn't as strong as being able to identify individual investments. However, DCA can work wonders with automatic contributions. For instance, when I'm investing in international equities, I like using DCA. I have one international mutual fund in some passive accounts and the DCA works crazy. However, I keep that as a very small portion of my total investment portfolio. As an expert on mortgage REITs, I prefer to pick individual stocks and entry points in this sector. For investors who don't like that strategy, DCA makes the most sense. Here's the sector breakdown from the iShares website:. Understanding how all the different management styles are impacted by interest rates is difficult. The mREIT sector is also hard to understand because it is highly leveraged and the portfolio fundamentals usually don't strategies those for the broad equity markets. It's difficult enough trying to understand what each individual management group is doing with an mREIT. The top of the holdings list starts with Annaly Capital Management and AGNC Investment Corp. Those are often the first two mREITs investors would think of if they were trying to name a few investments in the sector. They are huge mortgage REITs and previously were both very heavily invested in agency securities. Both have taken someone different turns. For Annaly Capital Management it was a diversification into credit, specifically CRE commercial real estate loans. For AGNC it was buying their external manager to get strategies effective expense ratio on common equity to the lowest level possible. Following the transaction, AGNC does have the lowest level of operating expenses to common equity. When you move down the list you'll see NRZ and Blackstone Mortgage Trust. This is where things start getting shakier because both companies are valued at hefty premiums to book value. Those premiums are most likely to be present when the market is trading at high valuations, so this creates a bit more correlation for the broad equity market. The fundamentals for NRZ certainly don't rely on strong domestic equities, but the share price does. I can applaud the diversification of strategies among the top several holdings, but I can't get over the price to book ratios throughout the sector. The fundamentals are not that different now from where they were in early In many ways, the fundamentals are actually worse now. Most mREITs have a high dividend yield, but one of the costs is a large amount of volatility. There is almost no way I'd invest in the sector without first having a very good understanding of how the different companies are leveraged and what exterior forces will impact them. If I were a newer investor wanting to get mREIT exposure, then this fund would definitely be an option. However, right now this sector is at high valuations overall. On top of that, REM is highly volatile and isn't an investment I'd want to make at options valuations. My outlook on REM is negative. I believe the sector is simply too highly valued. For investors looking to understand more about the mortgage REITs and how I'm able to find which ones are undervalued, check out The Mortgage REIT Forum. Coverage includes more than just mortgage REITs. I'm also covering preferred shares, the occasional equity REIT, and a few other strong dividend yield investments. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. ETF Screener ETF Analysis ETF Guide Mutual Funds Closed End Funds Editor's Picks. Colorado Wealth Management Fund. High expense ratio of 0. Extremely high dividend yield at 9. Invested almost fully in the mREIT sector, which has very high volatility. Were you looking for volatility? Expenses The expense ratio is currently. Yield The yield is currently at 9. Want to share your opinion on this article? Disagree with this article? To report a factual error in this article, click here. Follow Colorado Wealth Management Fund and get email alerts.
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